Factsheet: Personal loans

Thinking about taking out a personal loan to pay for
something special, such as a holiday or car?

Costs will vary depending on whether you take out a secured or
unsecured loan, so work out which option is best for you before you
go ahead.

TIP: Check that you can make extra
repayments

Check that a loan allows you to make extra payments as you go
along without a penalty, because the more payments you can make,
the quicker you can pay off the loan. Some loans are set up for a
fixed term and require fixed repayments. If the interest rate is
fixed, you may have to pay a fee or penalty if you make extra
payments.

How do personal loans work?

Personal loans are typically used for specific
purchases, such as a holiday or car. You borrow an amount of money
that you agree to repay within a certain period of time (called the
term). This can vary, but is usually between 12
months and 5 years. You will have to sign a credit contract
which will specify the amount borrowed and how you will repay
it.

You pay interest on the amount you borrow, which may be at a
fixed rate (where the interest rate is locked in
for the term) or variable rate (where interest may
go up or down over the term), plus any fees and charges. While a
fixed rate loan offers the benefit of set repayments, if you want
to make extra payments from time to time, you will usually have to
pay an additional fee - so think about what options are most
important to you.

A personal loan may be secured or
unsecured, depending on whether you offer an asset
such as your car as security for the loan. Secured loans can offer
a lower interest rate, but run the risk that the credit provider
may have the right to sell the security if you can't pay. You will
need to consider carefully which type of loan best suits your
needs.

TIP: How to borrow wisely

Organise your loan before you go shopping.

As with any credit product, compare interest rates, fees and
charges to get the best deal.

If you want to borrow a small amount(less than
$5000), you may have difficulty getting a personal loan from a bank
or other mainstream credit provider:

Some credit providers offer small personal loans in return for
comparatively high interest rates and fees. Search for small amount
loans at www.moneysmart.gov.au for what to watch out for with these
kinds of loans.

Consider using a credit card, which may be a
better option than other loans available to you. See our factsheet
Credit cards and
store cards.

If you are on a low income, you may be eligible for a no or
low-interest loan. See our factsheet No or low-interest
loans to find out more. You can also call our
Infoline on 1300 300 360 and we'll send any of our factsheets to
you for free.

Try to pay your loan off quickly to reduce the interest you
have to pay, subject to the conditions of your loan.

Find out whether you will be charged any default
fees and/or interest if you can't meet the loan
repayments.

Contact the credit provider early if you have trouble meeting
loan repayments to discuss your options (see step 5 on page
5).

Get help from a free financial counsellor or free legal service
if you can't pay your debts. See our factsheet Can't pay your
debts?.

Choosing a personal loan

How it works

What to watch out for

Secured loan

You offer an asset, such as your car, as
security or collateral for the
loan.

If you don't make repayments, the credit provider can repossess
and sell your asset to get its money back (without going to
court).

Unsecured loan

How it works

What to watch out for

You do not need to have an asset to offer as security.
Unsecured loans are usually harder to get, as you need to convince
credit providers that your credit worthiness and financial position
are good enough for them to give you a loan without you having an
asset to sell if you can't pay your debt.

If you fail to repay the loan, the credit provider can still
take you to court in order to sell your property and recover the
money.

Interest rates are usually higher than for secured loans, since
the credit provider is taking a bigger risk.

TIP:

Interest rates and fee and charges can stack up, so do your
homework before you sign up for a loan.

Shopping around for the best deal

What is the term of the loan?

A loan may seem more attractive than other forms of credit
because it offers a lower interest rate, spread over a longer term.
But it could end up costing you more by the end of the loan term.
Remember, the longer the term, the more interest you will pay.

When comparing loan options, make sure that the
term of the loan is the same for each loan you are
comparing (for example, compare a five-year loan with other
five-year loans). That way you'll get a true picture of the
difference in interest rates.

What is the Annual Percentage Rate (APR)?

The Annual Percentage Rate (APR) is the
percentage interest your bank or other credit provider charges you
to borrow money - this is usually referred to as the
listed or published rate. Once
you know the published rate, you can compare personal loans offered
by different credit providers.

If you multiply the published rate by the term, you will get an
idea of how much interest you will have to pay over the life of the
loan (bearing in mind that fees and charges are in addition to
this).

Credit providers may also advertise comparison
rates, which include the APR plus the main fees and
charges, to make it easier to compare the total cost of different
loans. So while one loan may have a lower published rate (APR), it
may have a higher comparison rate because it carries higher fees -
and so would cost you more overall.

Check if you will be charged a loan application
fee (may be as high as $250), and whether there are any
monthly service fees charged (may range up to $10
per month).

Most credit providers prefer you to make monthly payments by
direct debit from your bank account so you don't miss any payments.
Check whether your bank charges a late fee so you know what to
expect if you do miss a payment. If you are paid on a regular date,
set up the direct debit for the day after payday to minimise the
chance of not having enough money in your account.

Ask if there are penalties for paying off the
loan in full ahead of the agreed term. You need to offset this
against how much you'd save in interest by paying it out
early.

What are the credit contract terms and
conditions?

Always check the terms and conditions of any
loan contract before you go ahead.

Six steps to smarter borrowing

Step 1.

Work out if you can afford to borrow

Before you borrow money or consider refinancing, use our budget
planner to see exactly where you spend your money and how
much you can afford in repayments.

Save up as much as you can, so you can borrow less and save on
interest.

Remember to allow for interest rate rises and anything that
might affect your future income (such as changing jobs).

Step 2.

Shop around for the best deal

If you decide to borrow, take time to compare interest rates,
product features, and fees and charges. Even a small difference in
the interest rate can make a big difference to what you have to
pay.

Research published by the independent consumer group CHOICE can
also help you find the right product for your needs and budget -
see www.choice.com.au.

Step 3.

Know who and what you're dealing with

Anyone who wants to engage in credit activities
(including brokers) must be licensed with ASIC
or be an authorised representative of someone who is
licensed. If they aren't, they are operating illegally.

There is currently an exemption from licensing for credit
assistance provided through some businesses (for example,
retail stores and car yards). While the store may be exempt, the
actual credit provider must still be licensed. If you are unsure
who the credit provider is, ask the person you are dealing with to
point out the name in your credit contract.

To find out if a credit provider is licensed, visit
www.moneysmart.gov.au or call ASIC's Infoline on 1300 300
630.

Anyone engaging in credit activities (for example, by providing
credit or assistance to you) must give you either a credit guide
(with information such as their licence number, fees and details of
your right to complain) or a written notice with details of your
right to complain about their activities.

Step 4.

Keep up with your repayments

Keep your repayments up-to-date to avoid penalty
fees.

Make extra payments when you can, to save on interest (subject
to the conditions of your loan).

Step 5.

Get help if you can't pay your debts

Act quickly if you are having trouble making repayments. It may
be difficult to face the problem, but ignoring it will only make
things worse.

If you can't make the full repayment, pay what you can. Contact
your credit provider without delay.

If you are experiencing financial difficulties, you have the
right to apply to the credit provider for a hardship variation. If
the credit provider refuses, you can complain to its independent
dispute resolution scheme for a variation on the grounds of
hardship (see step 6 below).

There are places you can go for help - visit
www.moneysmart.gov.au for sample letters and information about
support services such as financial counselling and legal
assistance, call the National Debt Helpline on 1800 007 007 or call
ASIC's Infoline on 1300 300 630.

If you think that a credit provider has acted unlawfully or in
a misleading way, you can complain to ASIC online at www.asic.gov.au or call ASIC's
Infoline on 1300 300 630.

Contact us

ASIC Infoline: 1300 300 630

Disclaimer

Please note that this is a summary giving you basic information
about a particular topic. It does not cover the whole of the
relevant law regarding that topic, and it is not a substitute for
professional advice.